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Fall 2019
Active Readings for Business
Corpus N°6

Guillaume Sarrat de Tramezaigues

guillaume.sarratdetramezaigues@sciencespo.fr

1/ « The crude curve », The Economist, 2018 Pages 2-3

2/ « March of the machine », The Economist, 2019 Pages 4-9

3/ « Use surprise in negociation », Harvard Business Review, 2019 Pages 10-12

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Article 1 2 
The Economist
The crude curve
Dear oil helps some emerging economies and harms others
Prices between $50 and $75 seem to help global prospects; either lower or higher is harmful
May 26th 2018

When they are not fretting about the American dollar or Chinese debt, policymakers in emerging economies keep
a close eye on the oil market. The price of Brent crude has risen by nearly 50% in the past year to around $80 a
barrel. It ranks as the 11th-biggest spike in the past 70 years (adjusted for inflation), according to UBS, a bank. So
should emerging markets now worry that oil prices will carry on rising above $100, or that they will tumble below
$50? The answer is yes.

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Many emerging economies import oil; others export it. As a rule, higher prices hurt the first group and lower ones
hurt the second. But it can be more complicated than that. Indonesia, for example, is a net importer of oil, but a net 3 
exporter of “energy”, more broadly defined, including coal and palm oil. Since coal, palm and oil prices tend to rise
roughly in tandem, Indonesia would benefit overall from $100 oil, according to UBS. Mexico, like America, is also
a net importer of crude. But in both countries a higher oil price will help investment and employment in the oil
industry by more than it hurts household spending.

The impact of a price change also depends on the price level. A jump from cheap to dear oil works differently than
a jump from dear to even dearer. In America, many rigs that are not profitable at $40 become viable at $60 or more.
Conversely, most rigs that would be lucrative at $120 are already viable at $100. So an increase in price from $40
to $60 might inspire a lot of additional investment and employment, whereas an increase from $100 to $120 might
induce less. Meanwhile, the damage to household wallets increases relentlessly.

As a consequence, the relationship between oil and growth is not straight but curvy. Prices below $50 and above
$75 seem to hurt global prospects, according to calculations by Arend Kapteyn of UBS. In between, they appear to
help.

Thus if the oil price remains within its recent range, the global economy should suffer few ill effects. But that is a
big if. It is perilous to predict whether the oil price will lurch up or down, safer to predict that it will do one of the two.

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Article 2 4 
The Economist
March of the machines
The stockmarket is now run by computers, algorithms and passive managers
Such a development raises questions about the function of markets, how companies are governed and financial
stability
Oct 5th 2019

Fifty years ago investing was a distinctly human affair. “People would have to take each other out, and dealers
would entertain fund managers, and no one would know what the prices were,” says Ray Dalio, who worked on the
trading floor of the New York Stock Exchange (nyse) in the early 1970s before founding Bridgewater Associates,
now the world’s largest hedge fund. Technology was basic. Kenneth Jacobs, the boss of Lazard, an investment
bank, remembers using a pocket calculator to analyse figures gleaned from company reports. His older colleagues
used slide rules. Even by the 1980s “reading the Wall Street Journal on your way into work, a television on the
trading floor and a ticker tape” offered a significant information advantage, recalls one investor.

Since then the role humans play in trading has diminished rapidly. In their place have come computers, algorithms
and passive managers—institutions which offer an index fund that holds a basket of shares to match the return of
the stockmarket, or sectors of it, rather than trying to beat it (see chart 1). On September 13th a widely watched
barometer published by Morningstar, a research firm, reported that last month, for the first time, the pot of passive
equity assets it measures, at $4.3trn, exceeded that run by humans.

The rise of financial robotisation is not only changing the speed and makeup of the stockmarket. It also raises
questions about the function of markets, the impact of markets on the wider economy, how companies are governed
and financial stability.

America is automating
Investors have always used different kinds of technology to glean market-moving information before their
competitors. Early investors in the Dutch East India Company sought out newsletters about the fortunes of ships
around the Cape of Good Hope before they arrived in the Netherlands. The Rothschilds supposedly owe much of
their fortune to a carrier pigeon that brought news of the French defeat at the Battle of Waterloo faster than ships.
During the era of red braces and slide rules, today’s technological advances started to creep in. Machines took the
easier (and loudest) jobs first. In the 1970s floor traders bellowing to each other in an exchange started to be

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replaced by electronic execution, which made it easier for everyone to gather data on prices and volume. That, in
turn, improved execution by creating greater certainty about price. 5 
In portfolio management, algorithms have also been around for decades. In 1975 Jack Bogle founded Vanguard,
which created the first index fund, thus automating the simplest possible portfolio allocation. In the 1980s and 1990s
fancier automated products emerged, such as quantitative hedge funds, known as “quant” funds, and exchange-
traded funds (etfs), respectively. Some etfs track indices, but others obey more sophisticated investment rules by
automating decisions long championed by humans, such as buying so-called value stocks; which look cheap
compared with the company’s assets. Since their inception many of the quant funds have designed algorithms that
can scour market data, hunting for stocks with other appealing, human-chosen traits, known in the jargon as
“factors”.

The idea of factors came from two economists, Eugene Fama and Kenneth French, and was put into practice by
Cliff Asness, a student of Mr Fama, who in 1998 founded aqr Capital Management, an investment firm that runs
one of the world’s largest hedge funds. Quant funds like aqr program algorithms to choose stocks based on factors
that were arrived at by economic theory and borne out by data analysis, such as momentum (recent price rises) or
yield (paying high dividends). Initially only a few money-managers had the technology to crunch the numbers. Now
everybody does.

Increasingly, the strategies of “rules-based” machine-run investors—those using algorithms to execute portfolio
decisions—are changing. Some quant funds, like Bridgewater, use algorithms to perform data analysis, but call on
humans to select trades. However, many quant funds, such as Two Sigma and Renaissance Technologies, are
pushing automation even further, by using machine learning and artificial intelligence (ai) to enable the machines
to pick which stocks to buy and sell.

This raises the prospect of the computers taking over human investors’ final task: analysing information in order to
design investment strategies. If so, that could lead to a better understanding of how markets work, and what
companies are worth.

The execution of orders on the stockmarket is now dominated by algorithmic traders. Fewer trades are conducted
on the rowdy floor of the nyse and more on quietly purring computer servers in New Jersey. According to Deutsche
Bank, 90% of equity-futures trades and 80% of cash-equity trades are executed by algorithms without any human
input. Equity-derivative markets are also dominated by electronic execution according to Larry Tabb of the Tabb
Group, a research firm.

This must be the place

Each day around 7bn shares worth $320bn change hands on America’s stockmarket. Much of that volume is high-
frequency trading, in which stocks are flipped at speed in order to capture fleeting gains. High-frequency traders,
acting as middlemen, are involved in half of the daily trading volumes. Even excluding traders, though, and looking
just at investors, rules-based investors now make the majority of trades.

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6 

Three years ago quant funds became the largest source of institutional trading volume in the American stockmarket
(see chart 2). They account for 36% of institutional volume so far this year, up from just 18% in 2010, according to
the Tabb Group. Just 10% of institutional trading is done by traditional equity fund managers, says Dubravko Lakos-
Bujas of JPMorgan Chase.

Machines are increasingly buying to hold, too. The total value of American public equities is $31tn, as measured
by the Russell 3000, an index. The three types of computer-managed funds—index funds, etfs and quant funds—
run around 35% of this (see chart 3). Human managers, such as traditional hedge funds and other mutual funds,
manage just 24%. (The rest, some 40%, is harder to measure and consists of other kinds of owners, such as
companies which hold lots of their own shares.)

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7 

Of the $18trn to $19trn of managed assets accounted for, most are looked after by machines. Index funds manage
half of that pot, around $9trn. Bernstein, a research firm, says other quantitative equity managers look after another
10-15%, roughly $2trn. The remaining 35-40%, worth $7 to $8trn, is overseen by humans.

A prism by which to see the progress of algorithmic investing is hedge funds. Four of the world’s five largest—
Bridgewater, aqr, Two Sigma and Renaissance—were founded specifically to use quantitative methods. The sole
exception, Man Group, a British hedge fund, bought Numeric, a quantitative equity manager based in Boston, in
2014. More than half of Man Group’s assets under management are now run quantitatively. A decade ago a quarter
of total hedge-fund assets under management were in quant funds; now it is 30%, according to hfr, a research
group. This figure probably understates the shift given that traditional funds, like Point72, have adopted a partly
quantitative approach.

The result is that the stockmarket is now extremely efficient. The new robo-markets bring much lower costs. Passive
funds charge 0.03-0.09% of assets under management each year. Active managers often charge 20 times as much.
Hedge funds, which use leverage and derivatives to try to boost returns further, take 20% of returns on top as a
performance fee.

The lower cost of executing a trade means that new information about a company is instantly reflected in its price.
According to Mr Dalio “order execution is phenomenally better.” Commissions for trading shares at exchanges are
tiny: $0.0001 per share for both buyer and seller, according to academics at Chicago University. Rock-bottom fees
are being passed on, too. On October 1st Charles Schwab, a leading consumer brokerage site, and td Ameritrade,
a rival, both announced that they will cut trading fees to zero.

Cheaper fees have added to liquidity—which determines how much a trader can buy or sell before he moves the
price of a share. More liquidity means a lower spread between the price a trader can buy a share and the price he
can sell one.

But many critics argue that this is misleading, as the liquidity provided by high-frequency traders is unreliable
compared with that provided by banks. It disappears in crises, the argument goes. A recent paper published by
Citadel Securities, a trading firm, refutes this view. It shows that the spread for executing a small trade—of, say

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$10,000—in a single company’s stock has fallen dramatically over the past decade and is consistently low. Those
for larger trades, of up to $10m, have, at worst, remained the same and in most cases improved. 8 

Grandmaster flash
The machines’ market dominance is sure to extend further. The strategy of factors that humans devised when
technology was more basic is now widely available through etfs. Some etfs seek out stocks with more than one
factor. Others follow a “risk parity strategy”, an approach pioneered by Mr Dalio which balances the volatility of
assets in different classes. Each added level of complexity leaves less for human stockpickers to do. “Thirty years
ago the best fund manager was the one with the best intuition,” says David Siegel, co-chairman of Two Sigma.
Now those who take a “scientific approach”, using machines, data and ai, can have an edge.

To understand the coming developments in the market, chess offers an instructive example. In 1997 Deep Blue,
an ibm supercomputer, beat Garry Kasparov, the reigning world champion. It was a triumph of machine over man—
up to a point. Deep Blue had been programmed using rules written by human players. It played in a human style,
but better and more quickly than any human could.

Jump to 2017, when Google unveiled AlphaZero, a computer that had been given the rules of chess and then
taught itself how to play. It took four hours of training to be able to beat Stockfish, the best chess machine
programmed with human tactics. Intriguingly, AlphaZero made what looked like blunders to human eyes. For
example, in the middlegame it sacrificed a bishop for a strategic advantage that became clear only much later.

Quant funds can be divided into two groups: those like Stockfish, which use machines to mimic human strategies;
and those like AlphaZero, which create strategies themselves. For 30 years quantitative investing started with a
hypothesis, says a quant investor. Investors would test it against historical data and make a judgment as to whether
it would continue to be useful. Now the order has been reversed. “We start with the data and look for a hypothesis,”
he says.

Humans are not out of the picture entirely. Their role is to pick and choose which data to feed into the machine.
“You have to tell the algorithm what data to look at,” says the same investor. “If you apply a machine-learning
algorithm to too large a dataset often it tends to revert to a very simple strategy, like momentum.”

But just as AlphaZero found strategies that looked distinctly inhuman, Mr Jacobs of Lazard says ai-driven
algorithmic investing often identifies factors that humans have not. The human minders may seek to understand
what the machine has spotted to find new “explainable” factors. Such new factors will eventually join the current
ones. But for a time they will give an advantage to those who hold them.

Many are cautious. Bryan Kelly of Yale University, who is aqr’s head of machine learning, says the firm has found
purely machine-derived factors that appeared to outperform for a while. “But in the end they turned out to be
spurious.” He says combining machine learning with economic theory works better.

Others are outright sceptics—among them Mr Dalio. In chess, he points out, the rules stay the same. Markets, by
contrast, evolve, not least because people learn, and what they learn becomes incorporated in prices. “If somebody
discovers what you’ve discovered, not only is it worthless, but it becomes over-discounted, and it will produce
losses. There is no guarantee that strategies that worked before will work again,” he says. A machine-learning
strategy that does not employ human logic is “bound to blow up eventually if it’s not accompanied by deep
understanding.”

Nor are the available data as useful as might initially be thought. Traditional hedge-fund managers now analyse all
sorts of data to inform their stockpicking decisions: from credit-card records to satellite images of inventories to
flight charters for private jets. But this proliferation of data does not necessarily allow machines to take over the
central job of discovering new investment factors.

The reason is that by the standards of ai applications the relevant datasets are tiny. “What determines the amount
of data that you really have to work from is the size of the thing that you’re trying to forecast,” says Mr Kelly. For
investors in the stockmarket that might be monthly returns, for which there are several decades’ worth of data—

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just a few hundred data-points. That is nothing compared with the gigabytes of data used to train algorithms to
recognise faces or drive cars. 9 

An oft-heard complaint about machine-driven investing takes quite the opposite tack. It is not a swizz, say these
critics—far from it. It is terrifying. One fear is that these algorithms might prompt more frequent and sudden shocks
to share prices. Of particular concern are “flash crashes”. In 2010 more than 5% was wiped off the value of
the s&p 500 in a matter of minutes. In 2014 bond prices rallied sharply by more than 5%, again in a matter of
minutes. In both cases markets had mostly normalised by the end of the day, but the shallowness of liquidity
provided by high-frequency traders was blamed by the regulators as possibly exacerbating the moves. Anxieties
that the machine takeover has made markets unmanageably volatile reached a frenzy last December, as prices
plummeted on little news, and during the summer as they gyrated wildly.

In 1987 so-called program trading, which sold stocks during a market dip, contributed to the Black Monday rout,
when the Dow Jones index fell by 22% in a single day. But the problem then was “herding”—money managers
clustering around a single strategy. Today greater variety exists, with different investment funds using varying data
sources, time horizons and strategies. Algorithmic trading has been made a scapegoat, argues Michael Mendelson
of aqr. “When markets fall, investors have to explain that loss. And when they don’t understand, they blame a
computer.” Machines might even calm markets, he thinks. “Computers do not panic.”

Money never sleeps

Another gripe is that traditional asset managers can no longer compete. “Public markets are becoming winner-
takes-all,” complains one of the world’s largest asset managers. “I don’t think we can even come close to competing
in this game,” he says. Philippe Jabre, who launched his hotly anticipated eponymous fund, Jabre Capital, in 2007,
said that computerised models had “imperceptibly replaced” traditional actors in his final letter to clients as he
closed some funds last December.

And there remains a genuine fear: what happens if quant funds fulfil the promises of their wildest boosters?
Stockmarkets are central to modern economies. They match companies in need of cash with investors, and signal
how well companies are doing. How they operate has big implications for financial stability and corporate
governance. It is therefore significant that algorithms untethered from human decision-making are starting to call
the shots.

The prospect of gaining an edge from machine-derived factors will entice other money managers to pile in. It is
natural to be fearful of the consequences, for it is a leap into the unknown. But the more accurate and efficient
markets are, the better both investors and companies are served. If history is a guide, any new trading advantage
will first benefit just a few. But the market is relentless. The source of that advantage will become public, and copied.
And something new will be understood, not just about the stockmarket, but about the world that it reflects.

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Article 3 10 
Harvard Business Review
When surprise is a good negociation tactic
Roi Ben-Yehuda, Tania Luna
OCTOBER 03, 2019

When one of us (Roi) was nine years old, he visited the U.S. for the first time for summer camp. He was bullied by
kids for how he looked and his poor English. One day, Roi asked the main bully to meet him behind a building.

Away from the crowd, Roi said, “Look, I don’t like being made fun of, so either we’re going to fight here and now —
or you can shake my hand and we’ll be friends.”

Roi extended his hand. The bully, taken aback by the gesture, became a friend.
At the heart of this brief negotiation lies the power of surprise: a request to meet alone; the courage to fight; the
possibility of friendship; and the outstretched hand. All unexpected. The result? A new opening between
antagonists.

In most writing on negotiation, surprise is treated as a negative tactic. By adding new partners, changing deadlines,
taking back a promise, or creating ultimatums, you can throw your opponent off their game and cause them to make
poor decisions.

Negative surprise can indeed be effective. But negotiators can also use surprise in more positive ways: to signal
collaboration, generate creativity, destabilize negative patterns, and earn a positive reputation. To leverage surprise
constructively, we have to start with an understanding of what surprise is.

Although surprise is fleeting, it is cognitively complex. In Surprise, a book one of us (Tania) coauthored with Dr.
LeeAnn Renninger, we point out that surprise isn’t just a single state but a series of states. We call it the Surprise
Sequence: Freeze, Find, Shift, Share.

When something unexpected happens, we freeze. A P300 brainwave mutes all other cognitive processes and
forces us to focus on the discrepancy. Next, our brains attempt to find an explanation. Once we reach a conclusion,
we experience a cognitive and emotional shift. We also shift our perspective (i.e., I used to think X. Now I realize
Y). And according to neuroscientist Wolfram Schultz, surprise intensifies emotions by about 400%. Last, to make
sense of the surprise and reduce its cognitive burden, we share it with others. In psychology, we call this process
“sense making.”

Now, consider how the Surprise Sequence can play out in a negotiation. Let’s say you get a lowball offer. You
expected a market pay salary but get an offer that won’t even cover your rent. First you freeze (like a computer
stuck in loading mode). Then you wrack your brain to find an explanation (“Is it me?” “Is it them?”). You shift your
thinking and decide it’s definitely them, get angry (400% angrier than you would have been had you known the
salary), then go share a scathing review on Glassdoor. A positive surprise, on the other hand, like an unexpected
signing bonus, would leave you feeling like you walked away with the best deal in the world (whether or not you
did).

Given how destabilizing surprise can be, it is best to assume it will strike. Though pre-negotiation planning is
valuable, it is impossible to prepare for every outcome. But expecting the unexpected can reduce the disorienting
effect of surprise and even let us spot opportunities to use it for good. In particular, the following skills are most
effective in helping negotiators harness the power of positive surprise.

1. Q-step
As we found in our work at LifeLabs Learning, the best negotiators notice when something unexpected happens,
and they stay in the surprise. Rather than allowing themselves to jump (shift) to a conclusion, they suspend
judgement and step into question-asking mode. We call this skill “q-stepping.”

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Research by the Huthwaite Group found that expert negotiators ask twice as many questions as their average
counterparts. They spend roughly 21.3% of their communication making sure they’re asking the right questions and 11 
ask more questions when uncertainty increases.

Our research at LifeLabs Learning revealed a similar pattern. In one case, a manager we worked with faced a
difficult conversation with an employee who unexpectedly demanded a raise by saying, “I’ve been undervalued for
too long.” Rather than the typical (average manager) reply: “It’s not in the budget,” or “Your pay is more than fair,”
this manager stepped into questions mode: “Can you walk me through your thinking? What would getting a raise
mean to you personally?” As a result of the q-step, the employee’s real need became apparent: to be seen as an
important contributor. The two were able to effectively negotiate an adjustment in the employee’s visibility, saving
money and retaining an important member of the team.

Before, during, and even after the negotiation, get to a state of curiosity. Say: “I wonder what led them to that
thought.” Then q-step: make sure the first step you take is to ask at least one question.

2. Say “yes, if”

One of the classic tenets of improv is “Yes, and.” How do you keep a totally unscripted scene dynamic and
interesting? Say “yes” to any suggestion your scene partner throws out, then say “and” by building on the scene
with your ideas. So, if your partner says “we are on the moon.” You say, “Yes, and it’s made of vegan cheese.” The
more scene partners build on each other’s ideas, the more surprising and enjoyable the performance becomes.
Just as in improv, an unexpected suggestion during a negotiation can lead to a better and more creative outcome
than either partner anticipated. Yet most of us quickly shut down surprise since it threatens our plans. In a
competitive negotiation, “Yes, and” is seldom realistic, but “Yes, if” can create a win-win scenario.

For example:

 “I want to pay less than the asking price for this house.” “Yes, if you move all our furniture.”
 “I need a 10% raise.” “Yes, if you can cut costs by 10%.”
 “I want higher royalties on this book.” “Yes, if you sell 1,000 copies.”
 “I’d like to work from a different city.” “Yes, if you’re okay with a lower salary” or “Yes, if you can secure a
client in this city.”

We love this surprise skill because it pushes negotiators to generate more ideas and seek novel solutions rather
than getting stuck in an unproductive tug-of-war between two fixed positions.

3. Engineer surprise
In addition to handling surprise well, we can also leverage it to spark cooperation and creativity. For example,
imagine if instead of a typical, formal kickoff to a negotiation, you started by saying, “Look, I’m feeling a little nervous,
but I want this to go well for both of us. Can we agree we won’t settle until we are both happy?” This kind of positive,
unexpected move can set the stage for greater satisfaction with the process and outcome of a negotiation.

For example, Roi had to negotiate with a neighbor who was angry about noise (piano playing) coming from his
apartment. When the neighbor arrived at his house, he was ready for a confrontation. But instead, Roi asked him
about his favorite classical composer. Taken aback, the neighbor cautiously said, “Chopin.” What happened next?
Roi invited him and his family to a private Chopin recital (played by Roi’s wife). The invitation shifted the tenor of
the negotiation and led to a much friendlier relationship.

An even more unconventional example comes from a warehouse supervisor we interviewed whose approach was
so effective it continued as a tradition even after he left the company. Whenever his team reached deadlock in
conflict or negotiation, he played his favorite Elvis album (loudly) and invited everyone to dance. This surprising
break drained the tension from the room and increased people’s willingness to collaborate. Despite initial
skepticism, his staff began to compete over who would get to play their favorite music.

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A surprise of any scale can have a rapid impact on the mood, process, and outcome of the negotiation and the
relationship of the parties. Here is a list of surprises you can engineer to trigger a virtuous cycle of more trust, more 12 
creative problem-solving, and more collaboration:

 Offer a compliment or an apology

 Offer more options
 Use “I” and “we” pronouns
 Offer to extend a deadline
 Sit on the same side
 Publicly praise
 Use self-deprecating humor
 Make yourself vulnerable

And here are some unpleasant surprises that lead to a vicious cycle of distrust, animosity, defensiveness, and
deadlock:

 Saying an insult
 Being critical of the other party
 Reducing the choices on the table
 Using “you” pronouns
 Shortening the deadline
 Using an uncomfortable room
 Showing up late
 Publicly blaming
 Being sarcastic

The unexpected should always be expected in negotiation. The best negotiators know how to reduce its negative
impact and amplify the positive. So, whether you are dealing with playground bullies or adult ones (and especially
if you have been the bully yourself), we challenge you to apply one of the tools in this article in your next negotiation.
The result might surprise you.

Department of Economics– Oct. 2019